Dismay over IRS regulations relating to deferred compensation
(and other similar items of dismay)

Friday, June 17, 2011

Stockholder "Say On Pay" Initiatives Blocked by 409A

409A Wreaks New Havoc

"To illustrate the complexity of the interaction between Section 409A and corporate governance, let's say there's a negative say-on-pay vote against XYZ Corp. that appears to result, in part, from the CEO having accrued a $20 million vested SERP benefit. In order to convince shareholders that their concerns have been properly taken into account, the compensation committee negotiates a $5 million reduction to this SERP benefit with the CEO. This reduction, if implemented, would result from disregarding certain types of incentive pay that had counted as eligible compensation when calculating the SERP.

As a practical matter, XYZ's compensation committee intends to make larger annual equity compensation awards in future years based on the company meeting objective and challenging performance goals. The awards would allow the executive an opportunity to make up for the loss of the $5 million through future performance. It would seem that this type of negotiation and restructuring is what Congress had in mind when it enacted the say-on-pay provisions in Dodd-Frank.

Well, not so fast. The CEO could be stuck with a significant tax bill. As noted above, the SERP is nonqualified deferred compensation subject to Section 409A. So, if the later performance share awards are viewed as a substituted payment for the forfeited portion of the CEO's SERP, then there will be a Section 409A violation."

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409A Dismay by Rich Meisner. I created 409A Dismay as a public arena for expression of dismay over complex executive tax rules. I am an attorney with over 19 years of experience handling executive compensation and employee benefit matters for large and small companies, executives, employees and ERISA plan participants. Feel free to contact me if you have information that you wish to publish on this blog, or if you have any questions or comments regarding 409A.